Law School Investment for Dummies (Now w/ Link) Forum

[KraftEZ]

This needs to be stickied.

With age this could be a good tool.

[Bronte]

This needs to be stickied.

With age this could be a good tool.

Maybe YCrevolution (the creator of LSP and a TLS moderator) would be interested in adding it as a feature to LSP.

[Sky'stheLimit]

A) 28% is a retarded income tax rate. Here are the income tax rates for 2010, and if you're married, you can file jointly, so double everything.
10% Not over $8,375
15% $8,375 – $34,000
25% $34,000 – $82,400

so:
10% * 8,750= 875
15% * 25,250 (34,000-8,750)= 3,787.50
25% * 6,000 (34,000-40,000)= 1,500

Total federal income tax liability = 6,162.5 or 6162.5/40,000= 15.4%

B) Who expects to repay their student loans over 2.5 years? Law school is a LONG-TERM investment.

First, your forgetting FICA with is automatic 7.25% on top of everything else. Plus applicable state.

Second, I had heard accrued interest on edu loans is deductible on fed income taxes. Can anyone confirm, and is this a common state practice too?

First, I was only computing income tax, hence "Total Federal Income Tax Liability". But FICA is a regressive tax that caps at little over $100,000 a year.

Second, Not all states have income taxes (like FL, where I live). On the other hand, if you live in Manhattan you will pay federal, state, and city income tax. State and city taxes are deductible, but income deductions are not tax credits. They are only worth your marginal rate on the dollar, b/c they reduce your taxable income and your marginal rate is assessed on your adjusted gross income (AGI).

Third, Student loan interest is deductible, but as I explained before, they are only worth your marginal rate on the dollar (if you make 40k a year, they are only worth 25 cents for every dollar of student loan interest you paid, because your marginal federal income tax rate 25%) However, you cant create a generic tax liability calculator that includes the millions of possible deductions. Every individual has a unique fiscal obligation.

[Sky'stheLimit]

Ive read through all of the posts since my first posts, and now have a better understanding of what your doing. Given that all of your formulas are correct, it's a good analysis. It paints a pretty bleak picture of student loan debt. 160k a year salary is big assumption, and anywhere that you're making that kind of money out of LS you will need more than 40k a year to live. Personally, I would rather live a little more comfortably and pay my loans over say 10 years, as I HATE LIVING POOR/LIKE A STUDENT . Economically it makes sense, but this is another decision where economics aren't the only factor to consider. Like you said: "to each his own"

Thanks for posting this

[Bronte]

Ive read through all of the posts since my first posts, and now have a better understanding of what your doing. Given that all of your formulas are correct, it's a good analysis. It paints a pretty bleak picture of student loan debt. 160k a year salary is big assumption, and anywhere that you're making that kind of money out of LS you will need more than 40k a year to live. Personally, I would rather live a little more comfortably and pay my loans over say 10 years, as I HATE LIVING POOR/LIKE A STUDENT . Economically it makes sense, but this is another decision where economics aren't the only factor to consider. Like you said: "to each his own"

Thanks for posting this

Thanks for taking another read.

[fangonk]

It'd be pretty sweet if someone could post these excel files.... Just say'n.

[pizzaface]

.

[Bronte]

It'd be pretty sweet if someone could post these excel files.... Just say'n.

Assuming Bronte doesn't mind, I've uploaded it here:

--LinkRemoved--

No, I don't mind, but everyone should note that there's an error in the version that is currently available for download. I've emailed pizzaface the corrected version. The error is described in an edit to the original post. Once pizzaface gets a chance to upload the new version, I'll put the link in the OP. This also applies to everyone to whom I sent the email yesterday. Hopefully, you all got the second version of the spreadsheet I sent.

If you've already downloaded the spreadsheet, please make the following adjustments:

Cell C6, add: the effective tax rate you will be charged after law school. (As apposed to cell B6, which has the before law school tax rate. Obviously, both may be projections.)

Cell B29, change to: =B28*(1-C6)-F12

The after law school salary was not being taxed. This is a first-order mistake that has to be corrected.

[voice of reason]

OP: thanks for posting this. It's helpful to actually do some calculations to see what it takes to dispose of six figures of debt.

[pizzaface]

--LinkRemoved--

The corrected version

[doinmybest]

Bravo, this is a great addition to the TLS community. I'm going to be messing with this all day at work today.

[notaname]

LRAPs are more about the specific program than the math. I honestly don't know how they work, but if someone explained how they work we could probably find a way to factor it into the analysis. Adding the tuition increase would be no problem.

The answer for this is going to vary from school to school and will depend both on your income and the length of time that you do PI after graduation. I don't know that this kind of analysis would help people who plan on using LRAP over the long term to determine a target salary since pretty much every LRAP targets 10 years to pay off the loan.

With the new federal Income-based repayment plans, there are basically two good LRAP schemes. I'll detail them briefly, using NYU's LRAP and GULC's LRAP as examples. Keep in mind that every school has different terms.

NYU does not require its grads to enroll in federal income based repayment plans. For those making $50,770 or less, NYU will pay 100% of the student's loan payments--less the annual student contribution, an average of $5,100 total over 3 years--assuming that the student is on a 10-year loan repayment schedule. For those making between $50,770 and $80,770, NYU will also deduct 40% of gross income from work above $50,770 from their repayment loan. In other words, (SALARY-50,700)*0.4. NYU bumps the base income rate at the fourth and seventh year of the program to account for raises, and the change in the base rate is calculated annually by the school. Once you've had three years of qualifying employment, all of the money NYU pays on your behalf gets forgiven annually. After 10 years, obviously, you're done.

GULC requires its grads to enroll in IBR. For anybody making $75,000 or less, with some exceptions for spouse's income and so forth, GULC pays 100% of the IBR reduced payment. IBR reduces payment to approximately 10% of a borrower's salary. After 10 years, under IBR, the federal government forgives the loan. GULC "benefits would continue on a diminishing basis for incomes exceeding $75,000," but I couldn't find a specific chart. The obvious drawback to this plan is that, should a borrower leave qualifying employment for any reason in the 10 years before the loan is forgiven, s/he will be saddled with disproportionately high principal and interest balances because GULC has been paying, say, $5,077 a year instead of $21,262. (I used a starting balance of $151,000 in Stafford and PLUS loans.) On the other hand, those staying in PI law for 10 years and making $75K would pay at least $9,692 a year on NYU's plan and at least $0 on GULC's plan.

[notaname]

Sorry, I missed this. An additional consideration is that NYU deducts 50% percent of income between $70,770 and $80,770 instead of 40%.

[Bronte]

Thanks notaname. I'm sure that info will be helpful. Based on those examples, I'll look at estimating an economic value of various LRAPs. (It actually has the characteristics of a financial put option, albeit an exotic one. One's salary would be the underlying variable and the LRAP threshold would be the strike price.) Regardless, strong LRAP programs do add value to the investment.

[notaname]

Thanks notaname. I'm sure that info will be helpful. Based on those examples, I'll look at estimating an economic value of various LRAPs. (It actually has the characteristics of a financial put option, albeit an exotic one. One's salary would be the underlying variable and the LRAP threshold would be the strike price.) Regardless, strong LRAP programs do add value to the investment.

Thanks, Bronte. That sort of estimate would certainly help me with my own choice.

[ruleser]

I would add as a note that the $60,000 net desired income after taxes is a bit high - even if you put $0 in debt owed, you still need almost $100K in salary to get that. So that is skewing this thing a bit on the terror side. Living in LA, I do pretty well with under $40K net, including car payment, etc. Not saying you might not want a $60K net lifestyle (plus money in the bank, etc) But, just be aware when you use this if you leave the 60K net that is about $100K of your needed salary figure. You can play with that to see really how much of the number is from the loans.

[Bronte]

I would add as a note that the $60,000 net desired income after taxes is a bit high - even if you put $0 in debt owed, you still need almost $100K in salary to get that. So that is skewing this thing a bit on the terror side. Living in LA, I do pretty well with under $40K net, including car payment, etc. Not saying you might not want a $60K net lifestyle (plus money in the bank, etc) But, just be aware when you use this if you leave the 60K net that is about $100K of your needed salary figure. You can play with that to see really how much of the number is from the loans.

Yes, this is a very personal variable. Originally, I had it set to $40,000, and a poster believed it was too low. I understand that it's hard not to interpret the screenshots as the results of a study, and I didn't help by changing that screenshot in result to that concern, but we should try to avoid it. Mostly, the screenshots were taken during random stages of experimentation. My goal here is to set up a tool, not to come to any conclusions about the average financial viability of law school.

The best thing to do would be to enter a set of assumptions that are consistent with your unique parameters (e.g., the projected cost of your tuition and living, the required net income consistent with your lifestyle, etc.). Then, perform a sensitivity analysis by shocking the key variables up and down. This can be done casually or rigorously. However, the hope is that one then learns what are the key variables in play.

After all that, I will say that I agree $60,000 is high. It would obviously be advisable, and certainly feasible, to live on less.

[J-tow10]

Thanks for the post OP. I'm not much of a numbers person, but I think I will attempt to use the program before making a final decision.

Thread bookmarked.

[ConMan345]

Please excuse my lack of experience with numbers, but how does the Schlunk approach take into account raises on your post-law school earnings? Does it use the same 4%?

Edit: Also, what about the interest on the COA?

[Philaw]

Bronte-

First, thanks. This is a useful tool, and while the numbers may vary, having a tool to input your numbers and calculate the fiscal realities of law school attendance is something that is convenient and helpful. I'm not sure why TLSers are so naturally hostile, but for my end of it, I appreciate the effort that you went through to help, and it is appreciated. Thanks!

[nycparalegal]

Interesting tool. Although I think each student would need to make adjustments based on their school's LRAP and the use of IBR, if in PI. I still think this is great to get an general idea.

[bigred82]

I find calculators like this to be rather handy when crunching numbers.
http://www.payroll-taxes.com/calculators.htm
http://www.finaid.org/calculators/loanpayments.phtml

But then you also have to consider Healthcare and 401k payments as well.

[Bronte]

Please excuse my lack of experience with numbers, but how does the Schlunk approach take into account raises on your post-law school earnings? Does it use the same 4%?

Edit: Also, what about the interest on the COA?

To your first question: it doesn't. This probably makes it overly pessimistic. I'll turn it into a "growing annuity" and get that fix out soon.

To your second question: it does and it doesn't. The approach does not differentiate between debt financing and cash financing. This is because, economically, debt financing and cash financing are the identical. Either you put up the cash or you use someone else's cash and compensate them for the use of that cash (plus risk). Although it's economically correct, many will find it overly theoretical. This is why I include the first approach which gets right to the point.

The first approach asks: will I be able to service my loan?
The second approach asks: is law school worth the costs, regardless of price?

Interesting tool. Although I think each student would need to make adjustments based on their school's LRAP and the use of IBR, if in PI. I still think this is great to get an general idea.

Yes, loan forgiveness programs add value to the investment. I'm looking into a means of estimating economic value. (Currently, for those interested, a basic LRAP can be viewed as a type of binary option called a cash-or-nothing put. However, most LRAPs have additional terms that turn them into highly exotic options.)

[Bronte]

Quick Fix: Post-LS Raises

In the previous version of the spreadsheet, the excess earnings were treated as a fixed annuity--that is, it was as if you never got a raise. Version 1.1 (linked in the OP) alters cell B31 to: =(B29/(B25-B7))*(1-((1+B7)/(1+B25))^B26)*(1+B25). This treats the excess earnings as a growing annuity due, using the growth rate in cell C7 (default: 4%). This adjustment, suggested by ConMan345, makes the model less pessimistic (but more realistic).

Also, I know the OP is messy as hell. I'll plan to rewrite it, focusing more on explaining how to use the spreadsheet and on the rationale behind the model. As it stands, it's basically just a mechanical set of instructions to put the spreadsheet together. This is unnecessary now that it's linked.

[Bronte]

Nice work

Don't you think 10-16% discount rate is a bit high? Considering your loans are 8%?

For that discussion, I'll direct you to page seven of Prof. Schlunk's paper, from where Approach 2 is adapted: http://ssrn.com/abstract=1497044. In summary, he gives three reasons that the discount rate should be higher than the interest rate on student loans: First, the loans are government subsidized, reducing their riskiness to the lender. Second, we are discounting the excess earnings, which, as a residual cash flow, are significantly riskier than the income stream as a whole. Third, bank lenders are highly diversified--they do not have exposure to entity-specific risk--whereas the individual is utterly undiversified and is thus taking on both entity-specific risk and market risk. In short, the excess earnings are actually analogous to a highly levered equity stream. Schlunk actually uses much higher discount rates.